capital budget final
TRANSCRIPT
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MANAGERIAL ECONOMICS
Capital Budgeting & Investment Decision
Name Roll no.
Trupti C. Shinde MHRDM 1112115
Prasad Sule MHRDM 1112116
Mrunal Surve MHRDM 1112117
Praffula Waghamare MHRDM 1112118
Ayub Shaikh MHRDM 1112119
Santosh Hule MHRDM 1112120
Vijay Turkar MHRDM 1112121
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Capital Budgeting Process
What Is Capital Budgeting?
CAPITAL BUDGETING is the process of planning
the capital expenditure after a careful evaluation of
the available capital Expenditure alternatives.
Project Classification Types Investment Selection
Financing investment
Allocation of Funds among projects
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Factors influencing investment
decisions Technological Change
Competitors Strategy
Demand Forecast
Type of management Fiscal Policy
Cash Flows
Return expected from the investment
Non economic Factors
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Determining the size of capital budget
The open-ended approach.
The fixed or rationing type of budget
Case by Case rationing Approach
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Steps in Capital Budgeting
List of Investment proposals
Estimating cash Flows
Cash outflow Cash inflow
Methods of Project Valuation
Compounding Discounting
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Modern Techniques of investment
Net present Value (NPV) Criterion If NPV > 0, the project should be accepted.
If NPV < 0, the project should be rejected.
Profitability Index (PI) Criterion PI > 1 indicates a desirable investment.
PI < 1 indicates an undesirable investment.
Internal rate of Return (IRR) Criterion Accept when IRR > opportunity rate of interest
Reject when IRR < opportunity rate of interest
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Traditional methods of investment
The Payback period MethodI (initial investment)
P =
C (Net Cash inflow)
The Average return on investment method
Average annual profit (after tax)
ARR =Average investment in project
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Cost of Capital
Cost of Debt
After-tax cost of debt, Cd = Interest Rate (1 - TaxRate).
Cost of Equity Capital
Cost of equity is a risk-free rate, RF, plus a risk
premium, RP: Ce = RF + RP. Weighted Average Cost of Capital
Marginal cost of a composite dollar of debt and equityfinancing.
Cost of capital measures the real & opportunity cost to the firm
of financing investment & is critical for sound managementdecisions
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Capital Budgeting Decision Making
Rules
Urgency
Certainty of income
Intangible factors
Budgeting Constraints
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CAPITAL BUDGETING PRACTICES IN INDIA
Capital budgeting decisions are undertaken at the topmanagement level and are planned in advance. The Corporate
follow mostly top-down approach in this regard.
Discounted cash flow techniques are more popular now.
High growth firms use IRR more frequently whereas Paybackperiod is more widely used by small firms.
Capital budgeting decisions are of paramountimportance as they affect the profitability of a firm, andare the major determinants of its efficiency andcompeting power.
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